- : January 1, 2021
- : B. Krishnakumar
Identifying Swing High & Swing Low
As a student of technical analysis, you must be aware of the definition of an uptrend as a sequence of higher highs and higher lows and the downtrend as a sequence of lower highs and lower lows. While this is a simple definition, confusion may arise in the absence of a clear definition of high or low.
Let us try to wrap some structure around these highs and lows that aid in trend identification. In Point & Figure chart, we have this wonderful concept known as Mini-Top & Mini-Bottom which helps us objectively identify significant highs and lows.
If you are unsure about identification of mini-top or mini bottom, here is a quick and recap.
Now that we have a definition of a high and low, a sequence of higher mini-tops and higher mini-bottom can be considered as an uptrend and lower mini-tops and lower mini-bottoms may be considered as a downtrend.
It is important to remember that the trend need not be the same across time frames. Price can be in an uptrend in bigger time frame and in a downtrend in a smaller time frame or vice-versa.
Let us take Nifty 50 index as a case study to understand this concept of mini tops and mini bottom and use it to identify the trend and trend reversal across multiple time frames.
Here is the daily chart of Nifty 50 in 0.1% box size and a 3-box reversal. In the chart, it is evident that price in January 2020 dropped below the earlier mini bottom, which was a sign of weakness.
Price hit a low in March 2020 and a sequence of higher mini tops and higher mini bottoms was at play thereafter. Again, the fall last week resulted in the prior mini bottom being broken, suggesting that the uptrend since March 2020 is under threat now.
To me, the trend is bearish, and I would turn bullish only when the price closes above the recent high at 11,660.
Just to clarify, my basic definition of an uptrend is a series of higher mini tops and higher mini bottoms and vice-versa. I will suspect or consider a trend reversal when the earlier mini-bottom or mini top is broken.
Let us use the same definition in an intra-day Nifty Futures chart to understand the trend.
As highlighted in the chart below, the price moved past the earlier mini-top signaling a trend change in this time frame. And a series of higher mini tops and mini bottoms is playing out, suggesting that the price is in an uptrend in intra-day or short-term time frame.
In this time frame, the trend would turn bearish when the price drops below a prior mini bottom. The problem or confusion arises in this kind of a scenario where the trend is different across time frames.
Remember we are in a downtrend based on daily time frame. There is nothing wrong or absurd with this. It is in this context that you must be clear about which time frame you are trading in and frame your strategy accordingly.
Lots of whipsaw trades happen in this kind of an environment where the trend across multiple time frames are not in sync. Best trades happen when the trend is in sync across multiple time frames.
Just think about this and you can thank me later for those whipsaws that were avoided.
The next time you are eager to buy a stock that is falling, you can choose to wait for a mini-top to be broken in a lower time frame before considering the long trade. This is objective and makes a lot of sense if you apply your mind.
Let me know your thoughts and observations using this approach.
- Mini Top is completed when a double top buy is followed by a double bottom sell. The double bottom sell may happen immediately after the double top buy or a few columns later.
- Mini Bottom is completed when a double bottom sell is followed by a double top buy. The double top buy may happen immediately after the double bottom sell or a few columns later.